Unlike investors saving for long-term growth, I want income, and over a specific period between 2012 and 2015, between when I plan to leave work and before I draw my pension. I’ll draw it somewhat early, to reduce the annual amount.

The reasoning is that a pension is taxed as income, so if I can build dividend income to top it up in my ISA, drawing the pension early and lowering the annual amount keeps more of my income below the tax threshold, hopefully £10000 by then. It also lets me stop working earlier, which is all to the good, and I can make up the difference with the income from my ISA, which isn’t considered as income (though note that dividend income is already taxed at source in the UK)

I expect the government to be rapacious in clawing tax from as many places as it can as it fights the economic headwinds, and I want to do as little as I can to help them. Hence minimising income and maximising tax sheltered stuff.

Because of this short time scale I am seeking income, not growth from my ISA, though obviously at the moment I reinvest the income to maximise my tax-sheltered stake.

The trouble is that there is much complication. I target a yield of 5%, and it is hard to get enough diversification in an ISA using individual shares in a high yield portfolio. I try and keep any purchases in my ISA above £1000 and prefer lumps of £2000-3000. By using the grouping function of my ISA provider I can get trading costs down to £1.50 Since you can put at most £10,000 a year into an ISA, if I focused all my ISA as a HYP I would be woefully undiversified for a long time, accumulating 5 different shares a year.

Investment Trusts – diversification for a smaller stake

That is short of the required 15 according to TMFPyad or 20 according to Monevator. This year I cheated and used an investment trust, Merchants Trust, which I bought in July when it was at about a 5% discount. I bought a reasonable stake in it, MRCH is about 30% of my ISA, and planned to carry on purchasing similar sized lumps of another IT, next one around this time of year.

I fund my ISA from saving from earnings so I can’t load up at the beginning of the year as you’re supposed to. Plus I get some temporal diversification in buying through the year, which in a world of bear markets and double dips is no bad thing.

The DIY High Yield Portfolio (HYP)

So I have to look again at doing this HYP job for myself. Upside is no annual management charges, but the downsides suck, big time. They include that inherent lack of diversification to start with, the fact that I don’t have an illustrious career behind me as a stock-picker (I was hammered in the dot-com bust), and that the whole thing is a somewhat mapless territory. I really liked the investment trust route, and hopefully NAV premiums will go away.

However, I have to deal with the world as it is rather than how I’d like it to be, so some study of the theory behind a High Yield Portfolio is in order. I fully expect the double dip recession to return at some time in the coming year, which is good for share buyers though toxic for the value of a HYP. It may not be as toxic for the income from the HYP, however, it would be nice to see an analysis of that…

Real Estate Investment Trusts

If diversification were my aim, one class of investment I have no exposure to is commercial property. I hate anything with the mention of property in it as an investment – I sold the first house I bought at a 40% nominal, probably >50% real loss. Property is a dirty word all round for me. Let’s look at what commercial property is (the REIT I am considering is BLND)

It’s retail parks, warehouses and a lot of office space in London. Well retailers are going to do really well in the coming year aren’t they, what with VAT up, taxes up, Internet shopping up, punters squeezed on all counts. They’ll take an occupancy pasting in 2011. Office space in London, conversely, I feel okay about. The bankers will moan about relocating the top brass to Zug but they’ll still employ grunts in London.

Then we have the financials – unlike anything else I have ever seen. PE way down at 4-ish (I normally like to see that below 10 but have never seen anything below 5 that isn’t obviously dodgy) dividend cover way up at 5, yield of almost 5% (nice, I like that) and a decent dividend track record though the distribution frequency has changed from 2x a year to 4x.

There’s much to be said for buying something that the market hates, and that PE screams that the market hates BLND (and its stable-mate Land Securities which have very similar metrics) with a vengeance. I haven’t yet discovered why. Obviously the prognosis for commercial property isn’t that great, but it looks like these guys can eat a serious drop in rent income and still keep the lights on. And I do like that yield, so I am tempted.

I need another high-yield share around now and AZN comes to mind, yield about 4.5, PE about 10 and dividend cover of more than 2. And a very respectable dividend growth history. I already hold some of them as 3% of MRCH, the obvious competitor GSK is 7% or MRCH

All in all this whole HYP is a drag to try and do myself, but I can’t hang around in cash waiting for IT premiums to fall as I can’t call when the second dip will come along. So what I will do is build a HYP over the long term, accepting that I could get hammered by the lack of diversity in the early years, and divert my savings to ITs when they look good value.

That way the IT approach will give me the security of diversity, but I will still be able to build up my income when Mr Market is offering a poor deal on investment trusts. I don’t see a bull market turning up at any point while I am building my stake, which is when Mr Market offers a poor deal on everything.

Let’s just take time out to remember what the point of all this is, then

Everybody else seems to be gearing up for a preview of the next year, and now is a good time to do it, far enough for the excesses of Christmas to have faded but not yet blinking into the bleary-eyed bleakness of January’s wintry landscapes.

Where do we in the UK find ourselves at the end of 2010?

We are still fighting the economic fallout of a party that started with the ushering in of the millennium. Allied to deep-rooted flaws in Western capitalism that probably date from twenty years before then, we have been living beyond our means for a decade. If our expectation of the economy includes providing jobs that enable the average person to bring up a family and buy a house outright by the time they retire, we’ve been living beyond our means ever since the 1970s.

More recently we were lulled into a false sense of security by borrowing wealth from hard-working Chinese people, who haven’t been so much enjoying the fruits of their labours, they have instead been generously lending it to us to buy their stuff, aided by our banks creating bizarre forms of virtual wealth to park their wealth and hide the ugly truth from us. Whereas normally living beyond our means results in inflation, as shown by previous experiments in the 1970s, this time our foreign creditors sucked it all up, and only now has the true horror been revealed, when our corrupt banking system was unable to create any more virtual wealth that people could believe in.

We don’t add as much value to the world as we consume, leastways as far as the rest of the world is concerned, though we feel fine and dandy about it. Said rest of the world has been only too willing to lend us the money to make up the difference, but after ten years they are beginning to get windy about getting it all back. Hence all that talk from Osborne and his chums about austerity, though all that talk is not reflected in action on the UK balance sheet.

This is a battle that we, the people of Britain, are going to lose in my view. As an eminent British politician once said

It is not even the beginning of the end. but it is, perhaps, the end of the beginning.

There aren’t any guarantees that you start winning after the end of the beginning. Britain is a game of two parts as far as the economy is concerned – it is quite possible that we may save the economic system and lose our future living standards as individuals.

Increased inflation – it’s even beginning to give the Bank of England the willies now, after they spent most of this year studiously looking the other way in order to give over-indebted householders a chance to pay down their debts.

More grief among members of the Euro. If Ireland get hoofed out and/or default our banks are going to take another sucker punch, which won’t do us any good at all.

Possible loss of dollar reserve currency status, unwinding the last vestiges of Bretton Woods. That ride may be exciting, but it won’t be good

On the upside – what, there is an upside?

we might get control of the deficit, as the flipside of some of the above

the FTSE 100, with its massive overseas exposure may actually do okay

QE seems to be on hold for a while

house prices should fall by a good way. Nice if you haven’t got one, not so nice if you have a mortgage (that’s why you should have been paying the bugger down over the last year of low interest rates, rather than taking foreign holidays)

we might rediscover some of the home truths, that it is who is in your life rather than what consumer goods are in it which leads to lasting happiness

There are a lot of very nasty headwinds coming our way, particularly for those who are in work but heavily indebted with mortgage and unsecured debt.

If you are in that position and haven’t heard the bell tolling for you, then I would say you’ve lost the fight. You need a tin hat, and you needed it yesterday, you should have cancelled Christmas if you’ve been carrying on like this. Your job and way of life may be at risk. There’s some nasty stuff coming down the ‘pike, and now is not the time for carrying debt – of any sort. If you are lucky, the Governement will print money like it’s going out of fashion, which, provided you

stay employed

your wages keep up with inflation

your debt interest isn’t hiked

means your debt will be reduced as a proportion of your wages. That’s what they did in Weimar Germany, and it all took about a year to go totally pear-shaped. For those whose history is kind of hazy, it didn’t end well at all.

There are a lot of ifs in that list, and most of them are about to get less likely in 2011. If you have a guardian angel, get on the horn to them and get them on your side, you’ll need all the help you can get. A little bit of contrition for past profligacy might also help your case…

It doesn’t matter how many kids you have, or how much they want consumer goods like Silly Bandz, iPads and the like. The first duty of the executive of any household is to secure essential living requirements, and that means the roof over your heads, the food on your plate and the essential utilities to keep health. If your kids had a great 2010 Christmas but will be out on the street when the repo-man comes in 2011 then you have failed on all counts.

This store sells wants, not needs. Let's hope these guys have their mortgages under control at 10% interest rates, okay?

If you splurged this year on foreign holidays, spa breaks and Christmas gifts instead of reducing your mortgage you missed the plot.

Families used to be aware of how to prioritise needs over wants at a visceral level because they had seen it go wrong for enough other people on the street, and the threat of eviction kept the mawkish fondness for Christmas consumer frippery in check, as they knew it could happen to them.

Years ago while as a student in London I assisted with the University of London student union with a Christmas ‘soup kitchen’ for the homeless who then lived under the railway bridges at Charing Cross. Talking to people from the main charity they described how quickly a middle class life could fall apart, with the loss of a job leading to family breakdown and in those days usually the man ending up on the street. Senior civil servant to cardboard box resident in months…

I’m just saying that we aren’t very well prepared for this sort of thing. It happens suddenly, and my guess is a lot of it will happen next year. If you have a mortgage, ask yourself whether you can cope with base interest rates of 5%. Then ask yourself if you can cope with 10%.

Interest rates were 5% when I took out my first mortgage. I didn’t cover myself in glory in evaluating the risk I was taking on, but I was bright enough to ask the lovely lady who sold it me how much she expected mortgage interest to go up to. 7% was the reply, so I asked her to tell me what my repayments would be for that, and how much they would be for 14%. She harrumphed at the latter and said they’d never get that high. Well, it only took three years for me to end up paying 14% in 1992 ISTR. I was glad I asked the question, and had an answer, even though it meant a semi was out of the question and I had to slum it with a two-up-two-down.

It is possible that something is done to save the financial system, but very little can save the British lifestyle, we lived way beyond our means from 2000 onwards, and globalisation means that to preserve the economy a lot of that debt is going to get shaken out, from government, and from you and me, and that means a lot less money all round.

It’s payback time, for a 10-year long party when we hid the fact that we weren’t earning our way in the world from ourselves by splurging on the credit cards. Think repo-men and negative equity.And don’t shoot me for being a miserable scrooge-like git in the comments, I’m only the messenger reporting it how I see it. Believe me, I’d rather see you and your kids have a rotten Christmas in 2010 and a roof over your heads in 2011 than the other way round. If you know I’m talking bollocks then good luck to you, but if you just don’t like the idea and think why can’t someone else pay then I’m your party pooper of 2011, sorry about that.

The last financial crisis in the ‘developed world’ is almost beyond living memory now. That may not be the case for much longer…

I was lucky enough to have met my great grandmother, who had lived in Germany through the 1920s. She didn’t trust paper money, she didn’t trust banks, her economic belief was in holding hard goods and land.

Bear in mind that though this was in the 1960s, the German Deutschemark already had a legendary reputation as a result of Konrad Adenauer’s Wirtschaftswunder. As a very small child, I visited her in a nursing home which seemed a model of clean and attentive services (she was physically though not mentally frail that I could see) and the Germany I travelled through by train was clean and modern. This struck me when compared with the shabbiness of early 1960s Britain and the bomb-sites that still littered London which would provide me and my schoolmates a playground in the years to come.

As another example of why this looked odd to even an unsophisticated pre-schooler like me, my grandmother wondered why there were so many bangers on the roads of Britain, compared to at home where the VWs, Audis, BMWs and Mercedes Benzes that were the output of the Wirtschaftswunder were humming up and down the federal highways of West Germany.

So against this backdrop, what on earth was this good lady on – after all, her son-in-law worked for a bank. My mother explained that she had seen some bad stuff happen in the past and had lost her life savings, twice.

Inflation in 1920s Germany

This kind lady’s eyes sparkled as she passed over a piece of knowledge across four generations in the peculiar way that only personal knowedge can, and my grandfather from the bank filled in the backstory over te years to come, I think he even showed me one of these, which I recently saw again in a free exhibition entitled Inflation, War and Global Financial Crisis at the Fitzwilliam Museum in Cambridge.

a 100,000 Mark note

Here it is, a big, strapping 100,000 Mark note. It’s difficult to say how much this would have been worth, but the number on the front wasn’t so outrageous. For instance if it were Italian Lire before 2000 this would be about equivalent to a fifty pound note.

However, soon it wasn’t enough. It was causing the sort of problems the chap in the photo on this post was having. With the aim of easing the workload of the Weimar Republic’s chiropractors, and returning the country’s sack-barrows to the urgent task of moving barrels of Pilsner about, there was clearly a need for a bigger denomination.

Milliard Mark note. I believe a Milliard is a US billion, a thousand million or 10E9. It's a lot, anyway

Now let’s think about this for a moment. We’ve shifted scale from 100,000 to 1,000,000,000, four orders of magnitude. Consider the UK currency, which manages with a smallest note of £5 and a largest denomination of £50, just one order of magnitude. The Euro manages with two orders of magnitude, €5 to €500. Something very dramatic must have happened in Weimar Germany to need such a range.

Germany inflation (from wikipedia)

You can see in the five years from 1918 to 1922 the German population ate a hit of 100 times inflation. That’s pretty bad – though I’ve spent enough time berating UK inflation as rotting savings, these poor Germans experienced the same amount of inflation in five years as you would if you took 20 five pound notes from Queen Victoria’s reign and presented them to the Bank of England in return for two shiny £50 notes. That’s tough, but nowhere near as tough as the ten thousand million to one inflation they experienced in 1923. This ended when the Reichsmark took over and twelve zeros were struck off the paper marks.

10 Reichsmark note

This story impressed me as a pre-schooler. Imagine what it did to the German nation.

The ghosts of those who lost everything the Weimar Republic still whisper across the generations in modern Germany

I noticed it as a young adult when I took my first road trip to Germany and Switzerland in the 1980s. I was able to use my credit card in France, but as soon as I crossed the border at Aachen I had to use Eurocheques and a Eurocheque card. The Germans just didn’t do credit, they had seen where that had gone and even three generations down the line they would have none of it.

Even nowadays though credit cards find wider acceptance you would be ill advised to rely on it in Germany for everyday purchases, and cash is used more than I am used to in the UK. Other apsects of life are touched by the background radiation of the 1920s still decaying in the German collective conciousness, for instance a German would look at the British twenty-something’s eagerness to buy a house with a mixture of pity and wonder. Germans tend to save money and buy a house in middle age; and as a result they have a rental market that is far more lifestyle-friendly than in the UK.

This attitude to credit is part of why Germany now looks around it and the wreckage of European Monetary Union and asks itself “how did things get this way?” It is part of why Germans save more than Greeks, why they run a tighter fiscal ship.

Deep within the family traditions, the ghosts of the 1920s Weimar Republic are preserved and whisper to Germans why you don’t live life on the never-never, burning through tomorrow’s money today as we have been doing in the UK and in America. It wouldn’t be so bad if we spent it all on wine, women and song, but what we did with it is inflate the price of property, making ourselves feel richer by taking money from our future selves, and in a casual drive-by shooting of our younger folk inflating the price of an essential asset, accommodation.

History doesn’t repeat itself, but it can rhyme

There’s a clear takeaway from the German experience. It is harsh, and few people will have the balls to use it, but it is written in the graph above. As a German with financial wealth, you had one chance to do something about this, and it was in 1918 to 1919 (I’m aware that they may have been dealing with other problems as a result of action prior to 1918….) The message is this

When you have lost half your financial wealth to inflation within the space of a couple of years, convert your paper wealth into hard assets, or prepare to kiss it goodbye.

Now I’m not saying that it will happen here. Though our situation is dire, I’m not making the case that it is as desparate as that of the Weimar Republic. But I am saying that it could happen here.

It is hard to take that action under fire. It takes great intestinal fortitude to surrender the norms of one’s life to a new reality and then take action on that new reality. This sort of crisis is not within living memory in the West. It may take a different form, for instance peak oil and resource shortages might change the value of non-financial assets too. However, in general, the people that survive a black swan event are usually the people that do something different in response to their new reality.

Disclaimer

The response to inflation and the threshold is my opinion, and should be read as such. Look at the data and form your own opinion, and act accordingly. None of this should be construed as investment advice.

Having made the bold assertion that the aim of my ISA is to seek income, rather than the usual aim of seeking to increase my net worth, I then go and review 2010 in terms of net worth. Which is all nice, and party time as it so happens, but how did that income go?

It turns out to be incredibly hard to unscramble the egg and work out how that went. It’s probably easier if you are an accountant, but I’m not, so I had to do the best I can.

The issues are that I haven’t straightened out the targeting of my ISA properly, since at the moment it serves several masters in terms of my hopes and fears. The rationalists at The Accumulator and RIT would titter softly into their tea and mutter I told you so, and to some extent rightly so. To go anywhere you have to know where you’re going, and perhaps why.

However, it isn’t unreasonable for parts of one’s budget to get allocated to different things in real life. Not all your money goes on insurance, or hedonism, or rent, or tea and biscuits.

There’s a fair case to be made that where I screwed up was in not deciding in January 2010 how much ISA budget I was going to allocate to income seeking, how much to asset protection. However, being an opinionated SOB I say that Emerson was right,

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do.

Okay, I’ll steady on in claiming to be a great soul. I’m not that arrogant a SOB, though I’m working on it… However, my belief system does not assume that Western economies are paragons of stability, and at times I will seek shelter from the storms in golden and silvery ports, at times surf out into calmer waters. In the background I am trying to build an income.

You are only allowed to contribute ~£10,000 a year into an ISA, and I don’t do non-tax-sheltered investing so I have to do most of my saving in pension AVCs. Once I retire I will spring the tax-free lump sum and probably shovel it into ISAs over a few years. Assuming, that is, that in five years there still are tax free lump sums, ISAs and a £ that is worth more than a grain of rice…

So I have classified my ISA components as ‘income’ and ‘other’, other being balanced in hope (= emerging markets and growth stocks) and fear (= gold and silver)

2010 ISA stake versus income

So taking the income section, I plot the money I have spent on achieving an income on the left-hand axis, and the income I have received from that on the right-hand axis, conveniently scaled at 1/20th of the LH axis. If the maroon bars were to reach the same level as the blue bars, over than year I would have achieved my 5% target (5%=1/20th). So I fell short this year, my dividend return on a stake of £5500 purchase cost is £208, thus a 3.8% return. However, if I take into account that I only really pumped up my stake in July, my average stake over the year was £3800, so my return on actual stake is 5%. It’s a bit rude to expect people pay me the dividends in January for what I was about to buy in July 🙂

UK RPI in 2012

UK RPI has rolled in at 5% this year. Not being a lying bastard politician I don’t do CPI so I have got my income, however, the value of my stake had better have improved by 5% otherwise I will slowly be destroyed. I guess this is where I can’t afford to ignore net worth. The capital value of these income-yielding investments has appreciated by 15%, so I take off the 5% RPI loss leaving me with a stake at 110% of its real cost to me. So far so good, I can eat another two years of 5% inflation and still come good, assuming the capital value of the stakes don’t fall in numerical terms.

I feel okay about this as a strategy though I fully expect to see much more than 5% inflation in the next five years, this is where I hope the theory that equities track inflation over the long run holds up, otherwise I am in trouble.

So there’s much handwaving to get the answer there, either qualifying an income-targeted approach analytically is hard or I have made a particular dog’s dinner of it.

The other conclusion is that I have spent £5500 to get an annual income equivalent to three weeks Jobseeker’s Allowance. Assuming I sharpen up my act and target 100% of future ISA contributions, in six years I will have spent £70,000 to get the same annual income as going on the dole 😉 This doesn’t surprise me – you need about 20-25 times the annual income as a stake, so if I want 52*£65=£3380 then it stands to reason I need a stake of at least £70,000. But now you know how much savings you need if you can’t face the smirking questions from the spotty youths behind the desks at the Labour Exchange inquiring “what efforts you’ve made to find yourself a job in the last two weeks, Sir?”

So I think the conclusion of all that was I fall into the ‘did OK’ part of the annual report, though probably with a ‘could do better’ in terms of not chasing other goals. Next year I will focus on this income targeted approach as I think I have enough evidence that it works in principle broadly in keeping with theory. I need a jolly good stock market crash so I can get to buy ITs or income yielding shares at a 5% yield rather than 4% or less. I can see why people focus on net worth to see how they’ve done over a year – it is so much easier.

I’ve rudely pinched much of the title from BripBlap’s Early Retirement or Meaningful Work? post. It makes for interesting reading, and his post contains many of the things people say about work – that good work does far more than pay the rent, it gives you a structure and meaning. Steve gives this concept its head in the last paragraph –

But I have realized that my real dream is not early retirement, as I often thought it was. I dreamed of days of leisure. I’ve had those days now, as I’ve been unemployed. I don’t want leisure. I want work with meaning. My real dream is finding meaningful work, and it should be everyone’s dream.

Hmm, well I have to take issue with the last few words. Obviously if meaningful work is Steve’s dream, who am I to gain-say that, have at it, but there’s no reason it has to be everyone’s dream. Perhaps I am unusual in this, but I hear the distant drum of the Calvinist work ethic here, and I don’t like it.

Now for sure the initial impetus for me shooting for early retirement is that I find work sucks, both in what my own job has become specifically and what work has become in the post Thatcher-Reagan era. I have no personal experience of working pre Thatcher, but I saw the background radiation of the post-war employer/employee contract that preceded it in three of the four companies I have worked for, and the quality of my job has gradually degraded as it becomes more management-by-numbers rather than leadership by common sense. Indeed what has particularly changed over the last three decades is that managerialism has taken over from leadership, grinding out innovation and inspiration across the board. However, that’s a rant for a different day.

Early retirement, for me, is all about power. It’s not about meaning. Financial independence, for me, is about being able to meet my needs and a modicum of wants from resources that are mine and under my control. I want nobody to have power over my time, and I want to be at nobody’s beck and call.

The modern world of work is about debt slavery – borrow money for college, for a house, and while you are in hock you are owned by your job. I have served nearly my entire time with that, and I am buying my freedom, to be and to live according to the light of my own lamps, to chart a course guided by my own compass. Of course I will accommodate people or goals that are special to me, but the Company isn’t special to me. I work so that I get money, and I use some of that money to buy my freedom from debt slavery.

Having now eliminated all debts, the debt slavery I am now buying myself out of is the slavery of future incurred debts. Once I have my running costs and some spare I am safe from that.

Too many people conflate early retirement with not working. For me early retirement is not having to work. It is the freedom to do something, but to be able to flip the bird if anybody requires me to do something that conflicts with my own aims and desires in life. Freedom doesn’t have to be exercised – I might choose to go along with it if there is a greater good, but there shouldn’t be a coercive hold ‘do this or else we can make you lose your home’.

People get more awkward and cantankerous as they get older, because they accumulate power, and have seen stupid things lead to crap too many times before.You lose the starry-eyed belief that it is different this time, because it very rarely is. Many things have transformed the work environment over the years, but human nature has remained the same.

I have seen enough management initiatives, and TQM, MBWA, investing in people, corporate social responsibility, employee engagement (funnily never employer engagement) and similar claptrap to last me a lifetime. It’s all rubbish. What Western corporations are in dire need of at this time is competent leadership by top brass that actually gives a damn about the company, its customers and the people that work for it, rather than simply maximizing the size of their own remuneration package. We have never discovered a way of linking pay to performance in a way that doesn’t produce pathological behaviour, particularly at the top. The recent financial crisis is merely the results of this pathology writ large, across many sectors. It is endemic in our large companies, and they can only continue to turn a profit by grinding out efficiency in the layers below senior management, increase in scale or reduce workforce costs by outsourcing etc.

And I’m tired of working in systems run by chancers, yes. But though retirement can mean not working, it doesn’t have to mean not working. I was at RSPB Minsmere recently – the welcome desk is staffed by volunteers, as is the shop and tea room. Looking at these people, I would say most were retired, and they include a fair proportion of early retirees, indeed some faces were younger than me.

I presume none of them had to be there, they chose to be there. They had early retirement and, by evidence of the fact that they were there, meaningful work. The two are not mutually exclusive. Indeed, I would say that if meaningful work is what you crave, there’s a lot to be said for early retirement – it opens up opportunities for meaningful work that you couldn’t otherwise afford to take, such as those RSPB positions.

They’re all good, I assume, but as soon as you’ve chosen one of the nine you are no longer a passive investor. You are projecting your own hopes and fears for the future upon the empty screen of your ISA; you are choosing and making an opinion. Okay, it’s better than following share tips in the Torygraph – you at least choose a consistent direction for your course, rather than selecting a new direction every day. But you have chosen a direction.

I’m opinionated enough to be prepared to declare my asset allocation is a function of my hopes, fears and expectations, my imperfect comprehension of the economy as a whole, of how I view my imperfect state of knowledge, and what I consider the downside risks to be.

ISA asset allocation

This only shows my ISA asset allocation – I hold more than my ISA in pension AVCs but I don’t have the sophistication to be able to factor them in. So how does my asset allocation reflect my views?

Well, I am distrustful of the UK government, which I believe will debase the currency, shafting savers and hastening in serious amounts of inflation. So the gold and silver holdings (these are ETFs) should be no great surprise. They let me think about things without having to worry about the likes of Mervyn King silently stealing the shirt from my back devaluing the £. Devaluation was bad when I first came across it as a child when Harold Wilson did it in 1967 and no things aren’t different now, it’s still bad. I hadn’t intended to be so overweight in gold and silver, but they both appreciated seriously over the period I’ve been holding them. Or should I say the £ has gone down the toilet while they stayed the same?

The fixed interest and the dividend targeted holdings (investment trusts focusing largely on UK FTSE 100/250 constituents) are a logical consequence of my need for income in the space between two years from now and five years from now, after which the income will compensate me for drawing my pension early.

The emerging markets (=IBZL in my case) is part of the zeitgeist and my expectation that countries with a young workforce and oil reserves will have a better future than the bombed-out and indebted West. Next year I will add to that. I don’t do China – I don’t understand it and don’t trust it, but I will do India, a bit of Australia for their natural resources, possibly Canada for resources, and more of the same UK based IT wise.

I’ll probably give gold and silver a rest unless the Euro or the $ go belly-up, the former for daft attempts to synchronise Greek wastrels with doughty Germans without a Central Bank of Europe and a Central Tax Office of Europe, the latter for the mind-blowing whirlwind that will follow the loss of reserve currency status if the Chinese and the oil producers get their way. I don’t actually want such a high weighting on that, so I will dilute it by focusing on other classes with next year’s ISA allowance.

What’s wrong with my asset allocation, well, no exposure to other emerging markets. In an ISA you can only do so much in a year otherwise you end up with a zillion fragmented holdings, so I will take some of that on next year. No bonds – I don’t understand bonds, I don’t like them, and my pension to be provides much of the function bonds would in a retirement portfolio so I can afford to indulge my prejudices and ignore this asset class. I may consider commercial property via REITs though it’s another asset class that I don’t understand so I may go with Warren Buffett on that one too – don’t invest in what you don’t understand…

the picture is more balanced, though it is overweighted in cash for someone who spends time moaning about profligate government inflation stoking. Howeer, most of it is in a cash ISA and some of the rest is in NS&I index-linked certificates. Some of this is simply the standard personal finance emergency fund at work, but I target much more than the three months running costs standard recommendation. I will run, not walk, to the dooors of NS&I if they offer more RPI linked savings certificates in future.

This doesn’t reflect the value of my house or the nominal value of any of my non-financial investments, because then ‘other’ would eat up most of the clock and compress the categories into a wedge and make it hard to read.

So there it is – an unashamedly opinionated and un-passive investment asset allocation. In the end money is only crystallised power, and I can’t relate to an investment approach that tries to be unemotional, it doesn’t work for me. If I want to project force, then I must couple my values and beliefs to it. That doesn’t mean I have to chop and change on a daily basis – though my views to the future change over time, they don’t swing that dramatically day to day.

Obviously I must accept the imperfect nature of knowledge, and my own awareness and limited skill. It is why I invest in the stock market even though I believe there will be crash mk2 in the years to come, which could wipe me out totally in financial terms. That is why I invest as if the glass is half full, and at the same time as if it is half empty. It’s not just asset classes where you need diversity – it is also in world-views.

Although passive investing doesn’t sing to me, there is one behaviour that goes along with that which I have adopted. It is the Warren Buffett doctrine – buy and then hold. You have to screen for a reasonable price if you do that – the old drip-feeding idea also doesn’t really cut it for me. I want to buy cheap, and then hold, which means I have to sit and simply accumulate cash if I can’t find a suitable opportunity. However, the stock market of the last few years happens to suit my buying phase, particularly where I am chasing income.

Most people do this on the 31 December, but I’m with the Pagan tradition here 😉 Today, on the 21st December (for most years but not all) the day is at its shortest, and the night is longest. There was also a lunar eclipse on offer today to make it even more special, but cloud cover meant I didn’t get to see it. As the wheel of the year slows to a standstill, it is a good day for reflection on what has been, and for what is to come.

Finances wise I’m doing okay – my low-cost ISA provider tells me that I’m 15.92% up on the year. I don’t know if they count the dividend income in that since that is still sculling around as cash, but I’d happy with it, indeed I am dead chuffed.

And no, I’m not brilliant, or a future Warren Buffett, a fair share of that has to do with a certain degree of luck in timing. Anybody starting this year and with some of my hopes and fears would do okay. It’s also got to do with determination is saving; Quicken tells me than I saved about half of my gross income this year, which isn’t bad taking into account that Her Majesty’s Government steals about 25% of it to sponsor profligate bankers – well along with running schools and all that actually useful stuff too 😉 I’ve also bought into some non-financial assets which probably count for half of the residual what I am left, indeed that part of my wealth-preservation strategy to try and hedge the forthcoming financial shitstorms is done. I’ve been able to live on about 10-15% of my gross income, but on the other hand I didn’t have a holiday this year as you probably did 😉

I can focus on the financial from now, accepting the hazard that I could be totally wiped out in financial assets when the money dies because we are carrying on in a way that I can only see leads to what happened to the Weimar Republic. But I’m not wise enough to know for sure, so I choose to ride this dangerous horse in the awareness of its possible bad character.

I owe this man a beer or two, both for some seriously good tips, and yes, I’m happy to eat the consequences of my own bad choices but there really haven’t been any duff ‘uns to date and there are three elements that Monevator introduced me to which are responsible for about half of the current health of my ISA, the rest is my own hopes and fears.

To you, my dear readers and commenters a decent tip of the hat too, for insights, different points of view, different approaches and occasionally pointing out I am talking complete bollocks. Your help is much appreciated 🙂

Some things remain the same or continue to get worse – the slip-sliding decay of the company I work for from a once inspirational place to work into an outsourcing jobbing shop continues apace. I have at least found a niche in work culminating in 2012, which should take me to a good place to retire 🙂

The financial crisis continues to metastasize, hollowing out the shell of the Western World though leaving the apparent shell intact. It turns out the Goldilocks economy was nothing of the sort, and tragically this is being paid for by all sorts of people taken down as collateral damage. Looking at many people under 30, the big difference in their pattern of working compared to mine at 30 is less long-term or full-time employment, lots of short-term contracts for a year or two.

There is a general atmosphere of fear and loathing about employment prospects in much of the working population, as people begin to realise that the modern corporation does not really need that many people working for it to turn a profit, and it will subject those that it does employ in a roiling torrent of fads and inititatives, while busily outsourcing and subcontracting as much as it can to get away from any responsibility owed to customers, employees and shareholders alike, as short-term bonuses destroy strategic direction and company building at Board level.

Maybe there’s a good side in there. Perhaps it is Schumpeter’s creative destruction at work, though we should remember that his view of this as a positive force builds upon the priciples outlined in the negative view of Karl Marx’s schöpferische Zerstörung describing the way in which capitalist economic development arises out of the destruction of some prior economic order. That prior economic order, holding from the end of the Second World War to the implementation of the Thatcher/Reagan doctrine gave us decent pensions, banks that were stable in Europe, jobs that you could build a life upon and mortgages that were harder to get but possible to pay off, and some other good stuff.

Let’s hope the replacement can enable a lot of the population to lead stable, rewarding lives where they can bring up their families or pursue other dreams, aims and goals in some semblance of financial security. The last government hid some of the rotting core by pumping up the benefits system and employed an awful lot of people in the machinery of government, but the train wreck of the financial crisis scuppered that.

What lies ahead? Well, falling living standards for the majority of Brits, as they face:

Skyrocketing inflation due to the Bank of England printing money and not giving a fig about the nominal inflation targets.

Increased interest rates, hammering the personal finances of those who have overmortgaged, with falling house prices trapping them in negative equity

Wages not keeping up with inflation

Having to pay down high levels of consumer debt accumulated during the boom times

Credit crunch mark 2, possibly precipitated by the PIIGS destroying the Euro. There is no bailer-out of last resort now – sovereign governments in the West are bankrupt, so their guns have no ammunition left.

On the upside, if you happen to be debt-free and have money, you may do well in the stock market, or perhaps somewhere else – after all those companies seem to be able to make money without employing people, or if they do employ them then they employ them in low-wage countries. I expect power in the West to shift dramatically from labour to capital, for success there you want to have capital, you want to not have debts and you want to get you income from capital rather than working for a living. I am by not means rich enough to do well at that, though I am richer than 90% of Brits. That doesn’t make me as rich as you’d think – the wealth distribution is massively skewed at the top 🙂

Hower, I will try and reduce my costs, particularly energy costs, I will not acquire debts unless I am building up savings to pay down the debt at the same time as I incur it, and I am aiming to retire and get my income from capital rather than from working. I am trying to reduce my exposure to the downside and fan the feeble flames of what exposure I have to the upside. However, I am not an island, so though I am less exposed to some of the incoming economic headwinds I still expect to take a hit in living standards. If I can make it working for another two years then though my material living standard may fall, getting my own time back will be a massive increase in living standard, for time is something that is priceless – they’re not making any more of it!

Instead, develop the skills to do many ordinary things yourself. It doesn’t take nearly as much effort to develop and maintain a basic level of competence as it does to become good enough at something that you can do it professionally.

Now I’m a great fan of ERE, but I hadn’t spotted that in reading his blog, intellectually at least. And I’m far too tight to buy the book, since my library doesn’t carry US PF books. Practically, I was already following the lower specialisation path.

I am an serviceable carpenter, but not a cabinet-maker, and entirely self-taught to boot, apart from what I observed from my Dad many decades ago. That’s enough to save a few hundred pounds on making cold frames, though they’re hardly good enough to sell. And yes, I know every half-competent allotment holder does something similar, though I venture that even my substandard handiwork is better than about half of what’s out there 😉 However, my requirements were on a much larger scale.

That leads to one of the key things about living simpler, or differently, or extreme early retirement. It was reduce external dependencies, or put another way, increase self reliance.

The modern world is one where there is a high degree of specialisation and inter-dependency. It gains richness and variety in doing that. For instance, making Christian Louboutin high-heeled shoes is a seriously specialised job and you probably need a marketplace of hundreds of millions to be able to get enough demand, far more than the catchment area for a village cobbler.

Now it’s clear that Louboutins are in a different league from the functional products of a village cobbler, but all that specialisation does have its downside too. It sets us in a rat-race by definition, because all this dependency means that you have to persuade others to do things for you. Most of us aren’t beautiful enough or persuasive enough to do that without money, so we have to suck it up to The Man to get the money. Robert Heinlein wouldn’t have approved – specialisation is for insects.

It doesn’t have to be that way. Much of the battle here is to reduce consumption. The obvious implication is a reduced standard of living, well it stands to reason, duh. And yet funnily enough, yes, one’s standard of living does fall, but in no way does it drop in proportion to the difference in the cost of the excess consumption. The aim is to consume smarter at the same time – buy much less, but buy better. We’re talking scaling down and trimming the excesses, not living in communes or doing a 1970s Felicity Kendal. I choose my excesses rather that simply following the herd to go for excess in all things as instructed by those nice advertising people.

Buy secondhand rather than new – much of advertising is aimed at the “you need it now” brigade. There’s very little that you need now – you need the air for your next breath now, but some consumer item will probably be cheaper and better next year. If you can wait for the item to come on ebay at the right price, you’ll get far more bang for your buck. Obviously, if fashion, or things like the latest iPhone matter to you, then this won’t be a recipe for a happy life. I don’t get to see a movie until a few years after its out and it is on terrestrial (non-pay) TV. It doesn’t really matter to me – if it did, I could pay, but I choose not to. I spent some of this afternoon shifting about 20 rounds of wood from where a tree-surgeon had cut down a pine tree. Why? because I’d like to do the same for my gas bill as I did to my electricity bill.

The Rational Optimist disapproves of self-sufficiency in a big way, but there are some things that make self-sufficiency hard to argue with, provided it can be achieved with a modest amount of effort. One of those things is the 50% tax rate on nearly all purchases. Don’t believe me? Think about it.

If I buy my cold frames from a store, I have to pay 20% VAT on the product, plus 20% tax (I have driven my income below the 40% tax rate using AVC contributions, otherwise I would be paying 70% tax on purchases) plus 11% National Insurance on PAYE on earning the money to buy this. Thus I have to earn twice as much as the product costs. So for everything you see in a store, double the price to account for the tax you pay on the money to buy it.

That is why doing something for yourself often pays well – your hourly rate is double what it is when you earn money to buy the same thing, for the simple reason you aren’t taxed working for yourself. That’s where the basic level of competence works – I am sure I take longer to construct something out of wood than a craftsman, but as long as I am having a good time doing it then typically it costs less than half as much to do it in raw materials than it would be to buy. Plus I know how to service it. When I installed my Freesat dish out of scrounged bits it took me longer than an aerial installer would take, because he does it every day and has the workflow perfected. But it was a lot cheaper; though it should be noted I had the specialised knowledge from work.

As a society we have learned incompetence in doing things for ourselves – this Popular Mechanics from the 1930s shows how much has changed – I wouldn’t know how to go about half of this, and I am reasonably practical.

Some of the skills have been made redundant by increasing reliability and performance. I don’t need to know how to change piston rings, for instance – my car is coming up for 110,000 miles and still gets away with the annual service and MOT, something that was unheard of 20, 30 years ago. That is good. But some of the craft projects showed just how much people did for themselves, compared to now.

Some things that are obviously going to eat up money in future are energy costs, simply because we have only so much fossil fuel energy available and the demand is going up due to the increasing number of people wanting to live a Western lifestyle. I’ve already seen that – I have forced my electricity consumption down by more than half over the last six years but the total price I pay is still the same. Anticipating the same effect with gas, I aim to use this piece of equipment

multifuel log burner

to reduce my heating costs. It is a seriously low-tech piece of gear, a cast-iron box with a pipe out the back, into which you stuff wood and set fire to it. Compared to the gas central heating it’s a right PITA to use. But you can’t argue with the price of fuel – basically the cost of petrol for the chainsaw, though eventually we will be using biomass willow growing on a local authority allotment they couldn’t rent out because it regularly gets flooded with runoff from a road. You wouldn’t want to eat veg from there, but the willow likes water. If you keep your eyes open though, there is plenty of wood to be had for the asking as long as you are prepared for the grunt on carting it off and sawing it/axeing it up.

Now it’s obvious to me that fuel is going to go up in future. And in the general theme of becoming less dependent, not wanting to be taxed at 50% on needs and preferring to spend my money on stuff I really can’t do for myself, I want to get out of the money economy as much as possible for this necessity. That means some capital expenditure (log burner, chainsaw, chainsaw PPE) in return for reducing my long-term financial risks of being fleeced for power. My gas and electricity bills are about £800 together. I had to earn £1600 to be able to pay that. Some of that should be going to my retirement savings, not equally split between EDF and George Osborne’s war chest, thanks all the same.

The second post that tickled me was Change Your Life with Storytelling. I haven’t actually got to grips with this one yet, and this post highlighted that maybe I ought to. The narrative of what I am doing in life has an awful lot of what I am trying to get rid of, and arguably it doesn’t have enough of what I am trying to get more of. If I put my mind to it, it is still hard to picture where I want to be, and that may well incapacitate my ability to make that happen, because I can’t picture it. I feel I am in a mapless territory, and perhaps that needs to be addressed before I can unleash the power of saving to create and image a different, better, life.

Of course that may all be a load of metaphysical bollocks – such is the human condition that it is hard to separate the variables at times 😉

The standard personal finance mantra when in comes to stock market investment is to trickle a small sum regularly into passive index trackers. That will build up a decent lump to retire on over time. Though it seems to be a general consensus, there are critics of this philosophy, such as ERE.

There’s an awful lot to be said for index investing, and if it’s your aim to save a small amount of money every month for 30-40 years to get a decent lump sum to use as a pension, then you’ll be hard pushed to do better.

You are, of course, buying into an assumption that the country hosting most of your investments won’t experience a period of hyperinflation due to political pressures, worldwide resource shortages or peak oil. Think of how different the world looked in the 1960s and 1970s compared to now, and that was a period of relative stability for Western economies 😉

What if the investor doesn’t want a lump sum, but actually wants an income? And what if that investor is older than many in the PF community, at the peak of their earning capacity, and with lower outgoings? I can save at a far higher rate than most index investors in regular employment, but conversely I have far less time to do it. The stress of working in adverse (to me) conditions of the modern workplace will lay me low in years, not decades, so I have different requirements to the typical index investor, and some very different beliefs and expectations about the future than the conventional myth of continuous growth.

Jacob from ERE boiled it down to the essentials for me. Don’t spend money until it is re-earned. I don’t want a big lump sum, so I don’t give a toss about my net worth. What I want to do is be able to live off re-earned income. Put another way, I want to be able to sit on my big fat lazy ass and be able to watch daytime TV all day. Well, I don’t actually want to watch daytime TV all day as I don’t have a flat screen TV, but I don’t want to have to earn money to be able to live. Having said that, I’m happy to earn money for wants – its earning money for the needs that means your job owns you.

That’s a big ask. If you keep your wits about you, you can realise about 5% ROI on some investment trusts and indeed some stocks these days, which have a track record of paying dividends. So if, now, you were able to live on Ramen and fresh air, get the landlord or mortgage company to stop charging you for a year, and save your entire income for a year, you’d be able to get 1/20th of it, for the rest of your life. Obviously it’s going to take a long way to get to being able to live off that. More realistically, if you could save 50% of your income you would accrue 1/40th of your income every year, so you could slowly build up the 50% you do spend in in about 20 years. ERE has an analysis of this here, and an example here. In the latter, observe that there is a world of difference between saving 80% of your income and 90%.

I haven’t managed 90% in terms of saving to financial investments, though my savings rate does approach that in terms of total investment including non-financial ones. And no, it’s not a miserable way to live though it does require sacrifices. I have a lot of stored capital in terms of house and stuff, which reduces my outgoings, so most of my outgoings are utilities and things. Obviously I don’t have a flat-screen TV though I have a pretty good 15 year-old stereo. I’ve also got some pretty good camera kit and other hobby stuff from my more profligate and high-spending days. I favoured quality rather than quantity, and sadly I am still the primary limitation in the results I get with anything creative rather than the equipment. Improving my skill and fieldcraft is a lot cheaper that buying the latest and hoping it fixes it all for me.

Nobody said it was going to be easy.This is why people generally don’t take that route, and prefer to look at their net worth and play with compound interest calculators assuming a deferred result after 20 years to make the journey look less daunting and less lonely. I can’t afford that luxury because I need results soon, so I have to look the beast in the eye and face the bugger down, or surrender in the attempt. It’s a funny old game, this conflation of net worth with wealth – give me a decent income over winning the lottery any day.

I have some advantages over many other people – I paid off my house rather than using it to inflate my lifestyle, and I can save at the full ISA allowance rate of £10k a year, though note that only buys me an income of £500 each year 🙂 Which is why I have to save more money in index trackers (!) as pension AVCs to stop the taxman stealing so much of my earnings, which I will spring when I retire as a lump sum, so I can continue this strategy of buying a tax-free income about £500 a year at a time.

So for all those reasons, index tracking doesn’t cut it for me. Though it took me an awful long time to get the subtle distinction, I don’t really care about my net worth. What I care about is having enough income to cover my costs. As soon as I spotted this I switched my investment approach away from an ETF based buy and hold strategy to an income seeking strategy. Stock market investments are poorly suited for selling off itsy-bitsy pieces to produce a steady income.

The reason the standard advice targets growth rather than income is because for most cases the investment horizon is long – several decades. Mine is much shorter, and the usual logic is that people with short time horizons should favour the relative safety of bonds rather than shares. However, I have other accumulated investments that performs the function bonds do in a normal portfolio.

At the moment I target a yield of 4 to 5% on purchase, which means it costs me 20 to 25 times the annual income I want to buy. So I favour investment trusts, regular dividend payers like National Grid, as opposed to someting like Ishares FTSE100 ETF ISF, which I used to own but at the moment has a yield of just over 3%. I look for investments that have a decent track record of paying steady dividends, which is where the investment trust route is attractive. The downside of this is that getting a passive income that way is a very long, hard slog. To realise an income of about £4000 which covers my static running costs of heat, power, water, council tax, insurance and transport I need a capital sum of at least £80,000 which is a reasonably big ask. Well, it’s a big ask for me, even if it isnt for you, dear reader 😉

This is the antithesis of index investing, as advocated here by the Accumulator and Retirement Investing Today for example, though I’m more than happy to acknowledge Monevator’s excellent tutorials on investment trusts and general philosophy. And a long-dated hat tip to my Dad who disdained unit trusts and favoured investment tru sts more than 20 years ago when he retired. To my eyes an investment trust is an active, not passive, investment. I screen them first starting with the ones in this list (sorry TI, I know your articles aren’t meant to be used that way, I’m happy to take responsibility for my own errors and eat the pain along with the gain). I then look at the yield and the top-held shares in the investment trust, and the charges. Are the shares ones I would buy myself if I were after high-yield?

There’s an oft-repeated saw that you can’t time the market. Neither can I, but I can see a poor offer from Mr Market. An income of 4-5% on the current price I pay, particularly if the income has held over a number of years, is something I can work with. Its presence or absence will show itself a lot quicker than any putative capital growth. I can even eat a drop in capital value – if I buy an income and the income stays about the same, then my purchase is still delivering for me even if my net worth has dropped.

If share prices rise and yields drop, then I find myself priced out of the market – what I am looking for at the moment is a jolly good stock market price crash, perhaps as a result of the PIIGS finally going bankrupt, or the Americans finally looking down like in the cartoons, and finding nothing solid holding up their currency. I expect such opportunities to crop up in the next couple of years while I am working. The early part of 2009 and summer this year were good for me, I could use some more of that.

It has taken time to finesse this and realise that my requirements are very different from most people investing for retirement. Of course I could simply run down my capital, but I still have a fair few of my three-score years and ten to go, so the 5% income return I seek gives me a better long-term sustainable deal, and the value of the underlying securities may even track government-sponsored inflation such as caused by QE, though they won’t hedge inflation due to forthcoming resource shortages.

So although index investing seems to be a great way for most people to go, it isn’t necessarily right for everybody. It favours the young and impecunious, who need the long accumulation period and the effect of compounding. That long accumulation period also amplifies the effect of fees and charges, and tax if applicable. It favours those needing a big lump sum some way into the future.

But for those looking to get out of the rat race sooner rather than later, a different approach may be more rewarding. It is a lack of ongoing income that kills you financially – indeed some older people end up asset-rich and income poor if they are in a big house but short of income. However, it isn’t just greybeards that chase income, though most people chase net worth.

I know it’s pumped up for journalistic effect, but this lady writing in the Daily Mail bemoaning her impecunious Christmas tickled me as yet another example of the so called middle class’s lack of clue.

Charlotte Metcalf can't afford Christmas this year

Charlotte’s reasonably attractive, working as a television producer, previously on a decent screw of at least £62,000. If her £1200 weekly salary was net then it’s a darn sight more than that.

Now unlike some of the precious SAHMs writing for the Guardian, our Charlotte is in her early fifties, and therefore has some experience of life 🙂 And her story seems to be a breathtaking litany of failure to look around her and take stock.

She works in TV. Now when I worked as a grunt studio engineer in Television Centre a couple of decades ago, even I noticed something. Production was a young person’s game. You only had to look around the production gallery to see that most of the faces were in their twenties and thirties, and even those in the gallery were among the youthful and prettier specimens of the human race – both the guys and the girls. People in the gallery don’t appear on screen, it’s where production hung out directing the talent and switching the cameras and barking out the instructions to the talent and camera crew on the studio floor. Engineering was, by contrast, the domain of the, ahem, experienced, and the, let’s face it, more ugly members of staff, who were also predominantly male.

I was obviously not the only person to observe this, and there’s been a hoo-hah about it. Yes, you can rail about it all you want, though I wonder what part of television people don’t understand. The human race isn’t noted for getting more beautiful as it gets older, and sheer self-preservation would seem to make it a good idea to bear this in mind. Freelancers’ incomes are also notoriously variable. So what does Charlotte do? Let’s take a look.

She lives day-to day. Loads of wonga coming in? Splash with the £45 jars of face cream as gifts. Says much for her warm and perhaps over-materialistic heart, less for her active use of some of those five decades of life in learning that a freelance income has an ebb and flow… This is against the backdrop of a career in a field that appears to favour youth over experience, and in a creative field to boot, where it is notable that having kids sometimes takes away from the single-minded zeal that is sometimes confused with brilliance. All that adds up to past performance may not be a guide to future results, and that it might be wise to take that into account in one’s planning.

She and her significant other buy four houses, two pads in London and two in the country, one as an ‘investment’. Okay, so if you get together with a partner after 40 you may well end up with two houses.

Colour me naive, but before you go as a couple to buy another two abodes, maybe you should, y’know, get round to selling one of the existing ones? If you can’t sell a London pad for the price you’d like, maybe that is telling you something about the property market that you should listen to before you go long on property again? Particularly in a part of the country that doesn’t have rich Russian oligarchs, financial whizz-kids and tax-evading Greek shipping tycoons pumping London prices up ?

So what is the nature of the financial drought she is experiencing? We’re not talking slumming it on JSA with the unemployed. She’s down to £500 a week, which my trusty calculator is telling me is about £26000 a year, so still appreciably above the average national income. So what is she and her circle of ‘middle class’ friends doing about their straitened circumstances? Obviously not getting a clue, by these choice quotes:

Many of my friends are in quiet despair. One girlfriend told me that she’d planned to spend only £50 on her 15-year-old daughter and yet the same daughter is now asking for an iPad, which can cost more than eight times that.

FFS, this daughter is 15. In three years she will be considered a fully grown adult. Isn’t it time to introduce her to the little known fact that you can’t always have what you want in this world? I’d quite like my own private island, yacht and helicopter, thanks. But I know I won’t be getting that in this life, never mind this Christmas. Boo Hoo. It’s still possible to live a happy and meaningful life without an iPad, or an island, yacht and helicopter 😉

The lady who’s dragging this materialistic 15-year old up should perhaps ask herself what kind of values she is passing on to her daughter. Unlike the 1987-2006 period, her daughter is likely to be dealing with a world where decline, rather than growth, is likely to be the dominant theme of Western economies as perceived by most of the population. And she seems eminently ill-prepared for dealing with the world in which she will be scraping a living.

Just as I used to do as a ­little girl, my daughter has written a wish list to Santa and is confidently expecting him to wiggle down the chimney with a sack bulging with goodies ranging from a violin to Silly Bandz, the ubiquitous rubber bracelets all the rage among young girls.

She has been aglow with anticipation and her face lights up every time she hears the word ‘present’.

And the idea of having to disappoint her makes me feel sick to my stomach.

Charlotte, my dear woman, you should have started this process earlier, but now isn’t too late. Stop teaching your child that value is only measured in Stuff. She will chase an endless chimera of empty dreams and unfulfilled promises. But before you can do that, perhaps it is time that you searched in your own fifty-something year-old heart and asked yourself what your values and beliefs are. You made a pretty good start here. Time to take it to the next level – it wasn’t Stuff, but relationships that mattered to you. How about saving your child twenty of those empty years chasing the “having it all” dream then? You’re old enough to have realised that if you try and have it all you end up with having nothing. Pass it on 😉

I feel for you, Charlotte, because I have been some of where you’ve gone. It was only in 2009 that I was rudely awakened from the assumption that I would work until 60 in my current job and then retire on a reasonable pension. I was awakened. And looked around, and saw my company which had originally been an elite research facility was now a jobbing shop, more and more of the work was being outsourced to Indian subcontractors, and that basically the bell is tolling for me. I do know what a creeping lack of situational awareness does to you.

But I woke up, and smelled the bitter coffee. Then started doing something about it. That means starting saving and chopping costs. Stuff is just stuff. At your age, Charlotte, you will realise that it is the relationships and the people in your life that illuminate it, not the Stuff you have in the attic, or the expensive leather boots on your feet, or the fancy sofa. That’s the icing on the cake. The feature most important to you in your photograph is centre three-quarters right, and didn’t come from a store.

It is who is in your life, not what is in it, that matters, leastways it’s what matters for someone on your money. I can have sympathy for the people on Britain’s average household income. They may genuinely not be able to take any action to secure their future. But about 70% of households have less income than Charlotte’s, assuming her partner is bringing in about the same.

It’s time to do less of this

My mother always had a glossy, fat-berried holly wreath on our front door, but today something similar can cost well over £40, even if you try to track one down cheaply in a local market.

and time to take your child down to the local park or for a trip into the countryside and pick some holly from the hedgerows and make that darned wreath.

Don’t pick all of the berries because some strapped mistle thrush, fieldfare or redwing may miss them, but take some and you can have your very own fine wreath. If you hear the football rattle sound above, it’s a mistle thrush letting you know that he would rather appreciate if you left his winter food store alone, thanks very much 🙂

It's perfectly possible to make Christmas wreaths or even buy them for less than £40

She might even see some birds, and it’ll keep her away from the shops and the TV and the incessant buy, buy, buy, you need this thneedmessage. Don’t be such a daft materialist, woman. You seem to know the price of everything and the value of nothing, and it’s time to get a clue and look at where you’ve come from and where you’re going in life. If not for your own sake, then for the sake of your daughter!

Charlotte’s a microcosm of the middle classes, frightened like rabbits in headlights. Circumstances have changed. There’s less money about, and an awful lot of what we thought was money, such as housing equity, has been shown to be false. You need to do some forward planning, change what you’re doing and spending, and change it fast. It got through to my thick head a year and a half ago. There’s an economic shitstorm blowing into town, and you can bend with it or stand fast and be destroyed. Choose, but don’t be an ostrich!